Even as the government is likely to release the draft direct tax code for public response and inputs in a fortnight, it will take at least a couple of years to implement it. According to senior finance ministry officials, the tax code will require more time to incorporate opinions and issues raised during public debate and is likely to be implemented only by the end of 2011 or early 2012. The code seeks to revise the definition of income, manufacturing process and assets among other things to bring it in line with its various uses and do away with several interpretations.

“The way income was defined in 1961 is no more practically applicable. So, one of the first major changes will be to include various activities and sources that will count as income,” said a tax official. The definition tells us as to what activities, say in agriculture, that yield income will be included in the definition. The definition is not exhaustive given the varied activities taken up in agriculture, manufacturing and services.

In fact, the plan will also clarify the definition of income for certain sectors like insurance where money paid by the policyholder matures over a number of fiscals rather than the same fiscal. A lot of changes are expected to come even on corporate tax. The government plans to come up with a number of definitions that will make the balance sheet simpler, especially in the case of assets and liabilities. For example, by defining the very nature of assets it will be made clear whether a website is an asset for the company or not. “The direct tax code as we understand would be made simpler. At the same time, it should be so structured that it helps reduce litigation which is a major bane for the industry,” said Vikas Vasal, executive director, KPMG.